FX: Drop in US Unemployment Rate Sparks Mild Optimism
Daily FX Market Roundup September 4, 2020
Job growth in the US slowed in the month of August but instead of falling, the dollar traded higher against the euro and yen. US companies added approximately 1.37 million people to payrolls, down from 1.73 million in July. However, the unemployment rate improved dramatically, falling to 8.4% from 10.2% and most importantly average hourly earnings rose 0.4%. With the increase in the participation rate, the jobs report was pretty good considering that economists had been looking for no improvement in wage growth. Although part of the uptick was due to hiring of temporary census workers, numbers like these allow investors to shrug off the standoff in Washington and the ongoing pandemic. Investors are still holding out hope that with a successful vaccine, the economy will recover even faster. Ten year Treasury yields jumped more than 6% intraday but stocks extended their slide, leading market participants to wonder if a jobs report is good enough to halt the correction in equities.
As we look to the week ahead, the main question for FX traders is whether risk aversion will continue. First and foremost, Monday is a holiday in the US so there may not be much activity in currencies. There’s also very little US data on the calendar. Next Thursday’s producer price report and Friday’s consumer price index are the only reports scheduled for release and with the Federal Reserve allowing inflation to exceed target, even if it increases, the impact will be nominal. The lack of market moving US data means that stocks should continue to correct especially as the US Presidential election comes into focus. Positive vaccine news or a new aid deal by Congress are one of the few things that can turn the markets around.
While there’s very little US data, we have two central bank monetary policy announcements on the calendar. The Bank of Canada meets first on Wednesday followed by the European Central Bank’s meeting on Thursday. No changes are expected but investors will be looking to see if the BoC looks to adjusts its inflation approach like the Fed to accommodate greater flexibility. Canadian labor market numbers were also released on Friday and like the US, the data was mostly better than expected. Job growth beat expectations, the unemployment rate improved, the participation rate ticked higher, wages grew more than expected and most of the hiring was full time. IVEY PMI was slightly lower in August, but it could have been much worse. The Canadian dollar sold off initially but ended the day higher versus the greenback.
The ECB has a lot to consider when they meet next week including the strong euro, increase in virus cases and the ECB’s review of their inflation target. Cases in Spain are rising at a dangerously rapid pace. While both central banks are expected to maintain accommodative policy the ECB has more to be worried about than the BoC. Chinese and German trade numbers are also scheduled for release. On Friday, euro and the Swiss Franc traded lower against the dollar but the rest of the major currencies higher or flat on the day.